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Hyperscale Cloud has Huge Impact on Vendor Strategy

Back when cloud computing services were first introduced, some industry analysts thought it was obvious that traditional telecom service providers would participate in this emerging new opportunity. Eager to uncover new sources of revenue, telecom incumbents would likely enter the market with high expectations.

However, as the market evolved, the largest and fastest growing competitors would drive ongoing demand for their public cloud offerings by emphasizing lower-cost -- typically, much lower than most enterprise CIOs were able to match in their on-premise data centers. And, telecom service providers were equally challenged to keep pace with the cloud pioneers.

These leading cloud providers built highly optimized, hyperscale data center infrastructure that utilized commodity system components and automated service provisioning. This business model created the market dynamics for what is now referred to as the "race to the bottom" phenomena. Moreover, if a telecom operator wanted to stay in the game, then they had to remain price-competitive.

According to the latest worldwide market study by Technology Business Research (TBR), Cloud as a Service revenue -- which includes public and private cloud services -- attained by the traditional telecom network operators, will reach almost $10 billion annually in 2019.

Cloud Computing Services Market Correction

Though telecom carrier cloud providers will continue to increase revenue annually, TBR believes that their growth will start to decline over the next several years due to strong competition from hyperscale 'pure plays' and other savvy cloud providers.

TBR study findings now project that public and private cloud revenue for telecom operators -- such as Verizon and AT&T -- are beginning to de-emphasize their public cloud business. Profitability concerns, regarding the competitor price-matching trend, are a significant factor in their decision making process.

"Public cloud revenue growth started decelerating significantly in 2015 due to more businesses shifting to private and hybrid cloud solutions," said Michael Sullivan-Trainor, executive analyst at TBR.

Though public cloud services will remain the prominent source of carrier cloud revenue, private cloud services are growing at a higher rate as more enterprises prefer the platform's enhanced security.

According to the TBR assessment, the shift away from public cloud is also influenced by competitive pressures. U.S. carriers are struggling to gain traction in the public cloud market against seasoned competitors that are offering broader, more affordable service portfolios.

Fundamental Shift in Go-to-Market Strategy

Instead of attempting to out-compete the leading cloud vendors, TBR says that the telcos are now focusing on partnering with these leading companies, and providing network connectivity to their services through interconnection platforms such as AT&T's NetBond.

TBR’s "Carrier Cloud Market Forecast 2014-2019" also examined the telecom carrier cloud market within service segments -- including IaaS, SaaS and PaaS. TBR believes there will be a limited number of public cloud IaaS vendors by 2019, as IaaS becomes even more commoditized than it is today.

Regional players such as Orange and BT could successfully grow scale in their respective countries of origin as more emphasis is placed on data location and privacy. Conversely, the maturing SaaS market will cause revenue growth to decelerate through 2019. To bolster SaaS revenue, carriers will collaborate with software providers to offer solutions targeting new lines of business and verticals.

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